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Approach Chinese Incentives with Caution

February 01, 2009

For years, foreign investors took advantage of the various incentives local and central Chinese government authorities used to attract investment. But with the passage of new tax laws, this landscape changed dramatically. Investment incentives now are more restricted. Nevertheless, local governments in China can still provide some inducements to foreign investors. It is important for companies to carefully evaluate these lures, some of which may come in the form of exemptions from certain taxes or regulatory obligations.

Overall, exemptions granted at the local level are much less tenable than those granted at the central level. It is also essential to understand who is making the guarantees for exemptions and how transferable they are from leader to leader or agency to agency.

Companies have also reported that investment incentives have been retracted in the past, and that there is generally little they can do if incentives are lost—although local governments do have little reason to reduce incentives if an investor is bringing great value to the locality through local tax revenue, job creation, or production. Local governments are constrained by central policy, though, and can always point to other local agencies or central policies beyond their control to justify elimination of an incentive.

While investors should still pursue incentives aggressively, they should ultimately choose a business venture based on the strength of the business strategy, as incentives can change and have changed significantly over time.